Poor countries 'need to change'

The impact of the global crisis on the poorest countries is likely to be so severe that a radical change in policy is needed, a UN report says.

The UN Conference on Trade and Development (Unctad) believes new policy approaches are needed to diversify their economies.

The 41 poorest countries will be particularly dependent on aid, it says.

And it warns that the crisis is hitting the factors that enabled poor countries to grow strongly in 2006 and 2007.

Unctad says that "the magnitude of the crisis offers both the necessity and an opportunity for change".

The policy myths of the self-regulating market and minimalist government have been buried under the mounting economic debris of the financial crisis

Unctad

It says that the crisis is the result of "weaknesses in the neoliberal model that has been shaping economic policy for the last three decades" which have been "magnified by policy failures and lax regulation in advanced countries".

Unctad believes that the free-market neoliberal approach is no longer relevant to developing countries in the midst of a global recession, and instead is promoting public expenditure to stimulate growth, turning established thinking amongst economic policy-makers on its head.

Most vulnerable

The trade and development body warns that many of the world's poorest countries will be especially vulnerable to external shocks such as a collapse in commodity prices. The commodity-dependent African less developed countries (LDCs) will be hardest hit, it says.

Those reliant on commodity exports are more vunlnerable, the report says

They also have the "least capacity" to cope with a major economic dislocation as they have highly vulnerable currencies, little ability to raise additional government revenues, and a dependence on imports for food and fuel.

In the short term, Unctad says that poor countries will be highly dependent on official development aid to get them through the crisis - especially as private sector financial flows are likely to be diminished for some years to come.

But it warns that past experience suggests that aid flows decline during recessions in donor countries.

Policy changes

In the long term it urges LDCs to adopt an alternative development model, which should involve a reconsideration of the role of the state.

It says that countries should put an emphasis on public investment in infrastructure such as roads, bridges and electricity systems, as well as managing exchange rates and capital flows.

In order to do this, however, governments must be able to raise money through taxes - but many poor countries in Africa only succeed in getting 12% of GDP in tax revenues (compared to 30% to 60% in rich countries).

Washington consensus

Unctad's proposals go against the traditional, neoliberal advice given by such agencies as the IMF and World Bank, which focus on keeping inflation in check, preventing large budget deficits, and opening the economy to the private sector and private capital flows - the so-called 'Washington consensus'.

And it adds that "the policy myths of the self-regulating market and minimalist government have been buried under the mounting economic debris of the financial crisis".

Unctad says that LDCs may have to restrict capital flows to protect their currencies and intervene to manage their exchange rates.

However, many LDCs are now increasingly dependent on the IMF for balance of payments support during the crisis.

The IMF, which was given additional resources of up to $750bn (£457bn) at the G20 summit in April, says it has changed the way it works and no longer insists on such tough economic conditions before giving them emergency loans.

Unctad says it is not arguing for a return to old-style state intervention and asserts that there is no "one size fits all" industrial policy.

But it argues that the crisis shows that the state will have to play a bigger role in ensuring that poor countries diversify and develop their industry, especially in Africa.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.